Oil prices are slipping as producers continue a complex negotiation over who cuts production first

The geo-political environment in the oil industry is becoming increasingly complex as prices continue to weaken.

A research note by Citi’s commodity analysts shows that delicate negotiations are ahead for OPEC members and Russia to further cut supply and stabilise oil prices.

Citi said that a lack of cooperation from non-OPEC producers, namely Russia, and extra drilling by some OPEC countries is testing the patience of Saudi Arabia, ahead of OPEC’s next technical committee meeting in Kuwait later this week.

Benchmark crude prices fell to the lowest level in more than four months as US oil inventories came in higher than expected. Both benchmark crude and West Texas Intermediate have lost more than 10% in March.

Analysts noted that the latest disagreement between Russia and the Saudis appears to be due to a misinterpretation of the supply cut arrangement struck in November 2016.

In Russia’s view, it isn’t expected to comply with supply cuts until Q2 2017, while the Saudis pushed for immediate compliance.

Citi said Russia’s energy minister has asked for patience as operational conditions make it impossible for productions changes to be administered immediately.

That has put pressure on the Saudi energy minister who has gone ahead with the supply cuts agreed to in November while other producers kept the oil flowing. Citi said that Saudi Arabia over-complied on their share of production in January, but have since started to ramp up production.

Other complications remain with OPEC, as Iraq and Iran have both kept the taps on. According to Citi, Iraq’s energy minister argued last week that the supply cut agreement only applies to exports and not production, and that the country has already set a lofty production target for year-end.

Meanwhile, industry sources estimate Iran’s oil exports reached four million barrels per day in February, which is 200,000 above Iran’s cap as part of the supply cut agreement.

The Saudi oil minister confirmed last week that the key reason for extending the supply cuts beyond June is for oil inventories to fall back within their five-year range. In Citi’s view, that criterion means “it’s a done deal and the cuts get extended”.

Although Citi maintains the view that cuts will be extended, the odds are “clearly slipping” as Saudi Arabia’s patience is tested by non-compliance. The resulting uncertainty has contributed to recent falls in the oil price.

Also weighing on the oil price is the excess supply in US shale oil. Citi said that a draw-down is US crude inventories is expected as refinery capacity falls, according to data from the Energy Information Authority (EIA).

“This could be of particular importance for financial crude markets as US crude inventories are the most noted data point in the oil market and this may turn around the currently bearish sentiment. US crude inventories are expected to start drawing in April before global crude inventories start to draw-down from May.”

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